Budget Allocation in Early Retirement
I wanted to do a follow up to my earlier post about establishing priorities to achieve early retirement, in order to give an overview of how we've specifically allocated our annual retirement spending accounts now that we've gotten there. I've used percentages, rather than actual dollar amounts, because percentages are fairly applicable regardless of how small or large someone's particular budget might be.
Our annual retirement budget is divided between discretionary and non-discretionary allocations. These are currently at 38% and 62% respectively, a result of having worked very hard over the years, particularly the last ten months since I retired, to minimize our non-discretionary obligations. Let's face it - generally these are the least satisfying items to deal with in anyone's budget.
Here's our non-discretionary list, including the percentage of total annual budget revenue each is projected to consume:
Non-discretionary annual spend 1% Auto & Trailer Insurance 2% Auto & Trailer Maintenance 1% Cell phones 1% Gardener (yes, non-discretionary in our case!) 5% Groceries 2% Home & Earthquake Insurance 3% Home Maintenance 2% HOA Dues (includes swimming pool, spa and tennis court maintenance) 9% Medical/Dental/Vision Insurance10% Taxes 2% Utilities38% Total
And here's our discretionary list, including the percentage of total annual budget revenue each is projected to consume:
Discretionary annual spend 3% Auto Fuel 2% Cash (Our weekly mad money allowances) 5% Charitable Donations 2% Clothing 1% Electronics 3% Entertainment 2% Gifts 1% Gym 3% Hobbies 3% Home Decor 1% Housecleaning Service15% Major Items (Auto replacement, home remodel, major home repairs) 1% Personal Care (Haircuts, beauty products, etc.) 2% Restaurants18% Travel62% Total
Most of these categories are "use it or lose it," meaning whatever is unspent at the end of the year remains unspent in our portfolio. Four categories, however, will accrue for future usage. These are:- Home Items (I plan to continue to update my home decor as I feel necessary.)
- Home Maintenance (After one year of accruals, we will probably feel comfortable releasing future unused portions back into our portfolio.)
- Travel
- Major Items
Over the last 10 months I've been able to reduce our overall spend significantly by identifying a lot of waste, and cutting it out of our budget altogether. This included raising our insurance deductibles, cancelling all online subscriptions, cooking at home the majority of the time, and reducing our weekly auto fuel consumption by grouping errands, even doing some by bicycle or foot. We've also identified more efficient ways to achieve the same results, such as consolidating our land line, internet and cable services into one bundled package, using our public library instead of purchasing books and magazines, getting the occasional movie from RedBox instead of streaming them from our cable provider, planning our weekly menu around supermarket sales, taking group dance, piano and tennis lessons instead of private, and even moving to a vegetarian/quasi-vegan lifestyle. (Moving away from meat has resulted in a 15% reduction in our overall grocery spend, to my pleasant surprise.)
And a note about medical insurance, top of mind for anyone considering early retirement. We elected to go with a high deductible HMO plan that includes prescription coverage with a small co-pay, and basic preventative care at no additional cost. We are comfortable with this option because it's 1) highly unlikely either one of us will need more than preventative care for some years to come given our current states of health, 2) we can afford to pay the deductibles should it become necessary in any given year, and 3) we are covered for all other expenses, ensuring a catastrophic illness would not wipe us out financially.
Having such a large percentage of our annual spend marked as discretionary allows for considerable peace of mind as we prepare to move into dual early retirement in May. In the event our portfolio under-performs in any given year, we can easily adjust our discretionary spend and ride it out for as long as necessary. And we've also not included the cash value of our home in our long term planning, giving us the added cushion of knowing we could sell it and move to something less expensive to free up equity should it ever become necessary.
Establishing Priorities to Achieve Early Retirement
I placed a post about my husband's upcoming retirement on my Facebook page, and it wasn't too long before the first "must be nice!" reply appeared. So let me assure all that might be viewing this post that while yes, early retirement is nice, it's also available to a whole lot more folk than just my husband and myself. The question, really, is are you making early retirement a priority, or do your spending decisions indicate otherwise?
In conversations over the years with friends and acquaintances that are feeling squeezed, I can often identify spending behaviors that don't appear to correlate with their not-enough-money-to-ever-retire-early complaints. As an example, I recently had an exchange with an acquaintance that was considering leaving the profession of teaching because it left them feeling too financially stretched to ever retire early. However, this friend has such an over-accumulation of stuff purchased over the years they have to rent storage space at the cost of $75 a month. Which is $9,000 over the ten years they've been doing it, plus the loss of interest had this money been invested, plus, of course, the purchase cost of the unused items themselves. This friend also enjoys dining out on a very frequent basis, and watches for all new computer gadget releases with baited breath, buying each latest-and-greatest as soon as it hits the stores. And has the hefty credit card charges and monthly service contract fees that go along with chasing technology.
I also have a 50'ish friend lamenting about retirement that drives a late model luxury car, owns an iPhone and and iPad (plus the monthly service fees that go along with) and just purchased and remodeled an enormous new home.
And another that doesn't believe that vacations should ever involve cooking, but rather should always be spent in expensive hotels that necessitate eating every meal out. And as a result doesn't feel they will be able to afford to retire ahead of age 65.
From my perspective, all of these folk have a good amount of additional money to sock away monthly toward an earlier-than-65 retirement objective . . . they are just choosing to direct it elsewhere. Which is totally their prerogative by the way, but which would seem to indicate that early retirement really isn't their priority after all.
In our case, we knew early retirement was a priority, and tried hard to align our spending decisions accordingly. First and foremost, we lived below our means for many, many years. We also had to repeatedly resist the temptation to ratchet up our standard of living each time our paychecks increased, because as tempting as it was to do so, it was directly counter to our stated objective of early retirement.
We followed a 90/10 rule with our salary increases, company bonuses, tax refunds and other monetary windfalls - we saved 90% of the net, and spent the other 10% on something we both wanted, generally travel. We refinanced our home twice in order to lock in a lower rate of interest on our mortgage, and then worked to pay it off as fast as we could, ultimately in 17 years rather than 30. We primarily purchased used vehicles, and kept them for a really long time.
We also tried to be very careful about what we got used if it wasn't congruent with our projected early retirement budget. We kicked around the idea of getting involved with golfing or scuba diving, but ultimately decided we weren't willing to work the extra years necessary to include either in our retirement budget. It did, however, make both financial and physical sense to build our early retirement life around activities like hiking, running and bicycling. Aside from them being things we enjoy tremendously, they had the advantage of being good for us, and virtually free no matter where we were.
Each dollar saved put us closer to the point when we could retire - the point at which 3% of our amassed portfolio could cover our projected annual retirement income needs.
I guess the point I'm trying to make is that achieving early retirement is not impossible. It's a combination of living beneath your means and working to increase your savings % each year, paying off your home as quickly as possible, resisting the urge to spend "found" money, resisting recreational shopping or eating, looking for inexpensive ways to build regular fun and satisfaction into your life and never taking your eye off the ball.
Do you find the dental insurance to be worth the premium for the limited benefit (in my experience) that it provides? I'll have access to a good group health insurance plan in early retirement (until age 65) but I'm learning that my current dental and vision coverage isn't included in this bridging health insurance offering.
ReplyMy current dental coverage probably nets me a benefit greater than my current premium but its coverage tops out quickly if you need implants and/or crowns. I haven't yet looked into cost/benefits of post retirement dental insurance - easy to find? Good coverage?
Yes on both. Vision will be provided automatically with the medical HMO insurance plan we are signing up for, and dental insurance will run about $25 per month for each of us, or $50 in total. Our primary reason for purchasing both vision and dental insurance is to capitalize on the ability of the insurance provider to negotiate wholesale rates for care vs the retail rates we'd likely be subject to otherwise.
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